The Federal Reserve Open Market Committee has created a series of parabolic bubbles over the past 16 years and subsequently popped them in policy moves that raised raise rates too high and cut rates too low. Today, we focus on the inflating and deflating of the gold and oil bubbles, and the rise and fall of the euro vs. the dollar.

We begin with the steady but volatile decline in bond yields.

Despite the ups and downs of the federal funds rate, the yield on the U.S. Treasury 30-year bond has been declining since the beginning of 2000. When the 21st century began, the federal funds rate was 5.50%, on the rise since June 20, 1999, with the rate raised from 4.75% to 5.00%. The yield on the U.S. Treasury 30-year bond set its new-millennium high of 6.75% in January 2000, then set its cycle low of 2.22% in January 2015.

Comex gold was drifting lower as the year 2000 began, and traded as low as $255.1 the Troy ounce in February 2001. West Texas Intermediate crude oil prices were rising from a low of $11.28 per barrel in December 1998, entering 2000 at $27.18, then traded as low as $19.33 in December 2001. The euro vs. the dollar entered the new millennium just above parity, then traded as low as 0.8225 in October 2000 before beginning a solid uptrend.

After the federal funds rate was hiked to 6.50% on May 16, 2000, market dynamics began to change. The FOMC began to cut rates in January 2001 and after a series of cuts the rate was at 3.50% when terrorists felled the World Trade Center towers on Sept. 11, 2001. Rate cuts followed six days later and continued until the funds rate was cut to 1% on June 25, 2003. By this time the bond yield was declining, bubbles in gold and oil were starting to inflate, and the euro was on the rise vs. the dollar.

Let's take a look of the weekly charts for bonds, gold, oil and the euro, and consider the risk vs. reward for these markets in 2016.

Here's the weekly chart for the 30-year bond.


Courtesy of MetaStock Xenith

The weekly chart for the yield on the 30-year U.S. Treasury bond shows a downtrend from the 6.75% high in January 2000 through the lower highs of 5.44% in June 2007 and 4.79% in February 2011. If yields rise in 2016, the yield downtrend comes in at 3.84% around mid-year. Note how the 200-week simple moving average is a nearby support at 3.14% this week.

The high yield in June 2007 followed the series of 17 consecutive rate hikes of 0.25% by the FOMC that raised the rate from 1% in June 2003 to 5.25% in June 2006.

The first rate cut to 4.75% occurred on Sept. 18, 2007, as evidence built that a financial crisis was underway. This began the next wave lower for the bond yield in a plunge to as low as 2.51% in December 2008, just as the FOMC completed its 10th rate cut, taking the federal funds rate to 0% to 0.25% on Dec. 16, 2008, where it stayed for seven years. The cycle low for the bond yield was 2.22%, set in January 2015.

In my judgment, even if the FOMC raises the funds rate to 0.75% to 1% in 2016, which is a consensus, a key level to hold in January is 3.18% and 3.43% through June. If global economic growth slows and the FOMC stalls raising rates, the bond yield can decline again to 2.26% by the end of 2016. Note that the International Monetary Fund expects global growth to be "disappointing and uneven" in 2016.

Here's the weekly chart for Comex gold, showing an inflating bubble and the popping of that bubble.


Courtesy of MetaStock Xenith

The weekly chart for Comex gold shows that the gold bubble began to inflate when the precious metal closed above its 200-week simple moving average when the average was $281.4, during the week of Feb. 8, 2002. This move followed the FOMC rate cut to 1.75% on Dec. 11, 2001. The bubble peak was $1,923.7 set during the week of Sept. 9, 2011.

The popping of the gold bubble gained downside momentum when the price stayed below its 200-week simple moving average during the week of May 17, 2013, when the close of $1,364.7 was well below the 200-week, then at $1,445.3.

In my opinion, gold began to decline in anticipation that the FOMC would soon end quantitative easing and would soon begin to raise rates. If the FOMC followed its original guidance to raise rates when the unemployment rate fell below 6.5%, the first of 11 rate hikes were justified in June 2014, and if that had occurred, the funds rate would have been 2.75% to 3% on Sept. 17, 2015.

The key level to hold in January is $1,045.61, but if it does not, the downside is to $992.64 by the end of June. If the "flight to safety" returns, the upside is to $1,152.0 until the end of March. The maximum upside for 2016 is $1,639.8.

Here's the weekly chart for Nymex Crude Oil showing the inflating bubble and the popping of the bubble.


Courtesy of MetaStock Xenith

The weekly chart for Nymex crude oil shows that the first wave of the oil bubble peaked at $78.40 per barrel during the week of July 14, 2006. This high followed the 17th rate hike to 5.25% on June 29, 2006. Mid-2006 also marked the peak of the housing bubble.

Oil declined to as low as $49.90 during the week of Jan. 19, 2007. The FOMC made the first rate cut on Sept. 18, 2007 and this resulted in a technical breakout above the prior high and the parabolic bubble inflated to as high as $147.27 during the week of July 11, 2008, after the stock market began its crash of 2008.

The bottom of the popped oil bubble was $33.20 per barrel, set during the week of Jan. 16, 2009, a month after the FOMC cut the federal funds rate to 0% to 0.25%. The stock market subsequently formed a V-shaped bottom during the week of March 6, 2009.

Oil rallied with stocks until the week of May 6, 2011, when a secondary high of $114.83 was set. Oil was tracking its 200-week simple moving average since the week of Oct. 23, 2009, and this tendency continued until the week of Aug. 22, 2014. The break of the 200-week, then at $96.17, and oil has been below this key average since then. The 2015 crash of oil prices resulted in a 2015 low of $34.53 on Dec. 14, vs. the prior low of $33.20.

January begins with a key level of $34.07, and if that level fails to hold, the downside is to $29.90 by the end of March. The upside should be limited to the $44.07 to $48.75 as the world gets used to a lower threshold for energy costs.

Here's the weekly chart for the euro vs. the dollar.


Courtesy of MetaStock Xenith

The weekly chart for the euro shows that it dipped below parity at the end of January 2000 and stayed there until the week of July 19, 2002. Once the euro moved above the 200-week simple moving average vs. the dollar during the week of June 21, 2002, when the average was 0.9732, a trend above parity was highly likely. The weakening dollar theme began as the FOMC began cutting the federal funds rate in January 2001. The funds rate was cut from 6.50% to 6% on Jan. 3, 2001, beginning a run of 13 cuts to the 1% funds rate set on June 25, 2003. By then the euro was well above parity.

The cycle high of 1.6038 was set during the week of July 18, 2008, in line with the peak in oil and after the stock market crash of 2008. The 200-week simple moving average was a magnet between week of Oct. 10, 2008, and the week of Aug. 22, 2014, when the average was 1.3445. Dollar strength has been the theme since then, and that became the theme the strong euro followed. The 2015 low was 1.0456, set on March 16.

The euro vs. the dollar will likely trade in a choppy pattern as 2016 begins. A key level for January is 1.0729, with a key level until March of 1.0023, suggesting that parity will hold. If the euro pops above a key annual level of 1.1052, the upside is to 1.1786 by mid-year.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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